The paper is hard to get online, so I’ll quote myself:
Suppose we think of “the entrepreneur as the valiant, but overoptimistic investor rather than the heroic seer,” he wrote. In this story, entrepreneurs miscalculate their odds of success. They start more businesses than they should, but those mistakes lead to social benefits....
If the few big wins cancel out the many losses, starting a business would be a risky, but rational, bet—the sort of investment a “cautious businessman” might make. But Professor Nye argued that the wins and the losses probably don’t cancel out. Even the biggest winners don’t make enough money personally to cover the losses of all the individuals who went into businesses that failed.
The big winners are usually people who, based on rational calculations, shouldn’t have bet their time, money and ideas. They overestimated their chances of striking it rich. But they were lucky and beat the odds.
Even more important, the lucky fools create huge spillover benefits for society: new sources of wealth, new jobs, new industries offering less-risky opportunities, new technologies that improve life. Entrepreneurship does generate net gains, but most of those gains don’t go to the risk-takers. The gains are spread out to the rest of us. Capitalism, in this view, works by exploiting the capitalists themselves.
“We depend upon people continuing to open up new businesses for the success of industry and of the economy and for our health and well-being,” Professor Nye said in an interview. “But on the whole it probably doesn’t make sense for the average person to open up a business. Hence, the lucky-fools phenomenon.”
In 1991, economic historian John Nye published an article called “Lucky Fools,” which I wrote about in the wake of the dot-com bust (remember that?): https://vpostrel.com/articles/a-vital-economy-suffers-fools-gladly
The paper is hard to get online, so I’ll quote myself:
Suppose we think of “the entrepreneur as the valiant, but overoptimistic investor rather than the heroic seer,” he wrote. In this story, entrepreneurs miscalculate their odds of success. They start more businesses than they should, but those mistakes lead to social benefits....
If the few big wins cancel out the many losses, starting a business would be a risky, but rational, bet—the sort of investment a “cautious businessman” might make. But Professor Nye argued that the wins and the losses probably don’t cancel out. Even the biggest winners don’t make enough money personally to cover the losses of all the individuals who went into businesses that failed.
The big winners are usually people who, based on rational calculations, shouldn’t have bet their time, money and ideas. They overestimated their chances of striking it rich. But they were lucky and beat the odds.
Even more important, the lucky fools create huge spillover benefits for society: new sources of wealth, new jobs, new industries offering less-risky opportunities, new technologies that improve life. Entrepreneurship does generate net gains, but most of those gains don’t go to the risk-takers. The gains are spread out to the rest of us. Capitalism, in this view, works by exploiting the capitalists themselves.
“We depend upon people continuing to open up new businesses for the success of industry and of the economy and for our health and well-being,” Professor Nye said in an interview. “But on the whole it probably doesn’t make sense for the average person to open up a business. Hence, the lucky-fools phenomenon.”